8.92% NHPC Tax Free Bonds/Secured NCD of 2013-Good to invest

NHPC Tax Free Bonds, Secured NCD-October,November-20138.92% NHPC Tax Free Bonds, Secured NCD-Good to invest

In next 2 days NHPC tax free bonds / Redeemable Non-Convertible Debentures (NCD) are going to hit the markets. The interest rates are similar to PFC Tax free bonds 2013 which are currently open for subscription. While I am providing analysis on NHPC tax free bonds in this article, I would also provide some additional facts about bonds which I have not covered in my previous articles.

About NHPC Tax Free Bonds / NCD

National Hydroelectric Power Corporation Ltd (NHPC) is a government enterprise. It is planning to issue Tax free bonds / NCD’s and the issue would start in the next couple of days. The issue is for Rs 500 Crores with an option to retain additional over subscription for Rs 500 Crores aggregating to Rs 1,000 Crores.

Also read: Complete Guide on New Pension Scheme

Features of NHPC Tax Free Bonds / NCD’s

  • Issue start date: 18-Oct-2013
  • Issue end date: 11-Nov-2013
  • The face value of the bond is Rs 1,000.
  • Minimum investment – 5 Bonds i.e. Rs 5,000 and in multiple of 1 bond thereof
  • Interest rates for Retail investors including who invest up to Rs 10 Lakh investment.
  • 10 Years – 8.43%
  • 15 years – 8.79%
  • 20 years – 8.92%
  • Non retail investors would get an interest rate of 0.25% lower than the retail investor.
  • Interest is paid annually.
  • Interest earned on the Bonds shall be exempt from Income tax u/s 10 (15) (iv) (h) of the Income tax Act, hence there is no TDS deducted by company on interest.
  • Registrar for this issue is Karvy Computer Share Pvt. Ltd
  • These Tax free bonds would be listed on BSE and NSE and these can be traded. Hence these are liquid investments.
  • Non-Resident Indians (NRI’s) cannot invest in these tax free bonds.
  • You can apply in demat form or physical form.

Below are the Interest rates chart along with pre tax returns for individuals with various tax brackets.

NHPC Tax Free Bonds, Secured NCD-Interest chart

Why to invest?

  • NHPC is a public sector company and it is safe to invest.
  • Attractive tax free returns up to 8.92%. If you are in a high tax bracket of 30%, your pre-tax return works out to be 12.? %. Currently banks are offering 9% interest rates (pre-tax). Similarly if you are in the 20 % tax bracket, your pre-tax return works out to be 11.? %. Hence these bonds offer good interest rates for everyone whether lower tax bracket or higher tax bracket.
  • CARE, ICRA and IIRPL have rated this issue as AAA.

Why not to invest?

  • No reasons for not to apply.

How to apply?

Since these are issued through the demat form, you can apply through your broker where you are maintaining demat account. Alternatively if you do not have demat account, you can apply through physical form by downloading the application from various sites. I feel it is better to apply through demat account for easy liquidity.

NHPC Tax Free Bonds Vs PFC Tax Free Bonds Vs IIFCL Tax Free Bonds

Safety: All are public enterprises, hence all these tax free bonds are safe.

Credit rating: Both these tax free bond issues have been rated as AAA by the rating agencies.

NRI’s : NRI’s cannot invest in IIFCL and NHPC. However in PFC, NRI’s can invest.

Interest rates: For a 20 year bond, both offer 8.92% tax free interest.

See the comparison chart

NHPC Tax Free Bonds, Secured NCD-Comparison

Also read: Can you copy paste a investment idea from others?

Retail investor selling them to non-retail investor, what happens to interest rate, would it be still high or 0.25% lower?

I missed this point earlier. A-Series bonds are for non-retail investors who would get 0.25% low interest rates compared with B-Series bonds which are for retail investors.

B-Series Bonds (Retail investors) sold to Non retail investors: Since B-Series bonds contains 0.25% high interest rates, if they are sold to non retail investors, they would get only lower interest rates though they carry high interest rates. E.g. Suresh, a retail investor who would get 8.92% interest rates for 20 year bond sells them to non-retail investors, they would get only 8.67%.

Vice versa can also happen.

Conclusion: NHPC or PFC Tax free bonds, both are good for investment. Locking your money in such bonds would not only help you to get high tax free returns, but also to protect your investment from increasing inflation.

What are your opinions Tax Free Bonds? Have you invested in any bonds earlier? What is your experience?

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Suresh
NHPC Tax Free Bonds, Secured NCD-Good to invest

Suresh KP

30 comments

  • Drsunilmalhotra

    Is it better to buy 15 years 8.71 interest paying taxfree REC bonds at rupees 1115 from secondary market (i will get interest for 13 years only)or i buy new hudco bonds paying 7.64 interest at rupees 1000 for 15 years. In the long run which is more prifitable.

  • Satish

    Hi Suresh,

    I admire your work.

    Are the investments in Taxfree bonds deductible under Sec80C 1L limit? Pls. advise.

    • Satish, Tax free bonds and tax saving options are different 1) Tax free bonds – The interest income is free. There is no tax 2) Tax saving option u/s 80C, if you invest upto Rs 1L, you would get tax exemption and this would be reducd from your taxable income.

  • Saju

    Dear Suresh,

    I checked my NCD statement at CSDL site that I found the value is less than the amount I invested, as I have the knowledge that NCD is getting a fixed interest, then why this statement showing less. Will you please explain this.

    • Hi Saju, This is common phenomonen for NCD and Tax free bonds which are listed on stock exchange. At maturity you would get your purchase price. Every year you would get interest. However since these are traded like any other stock, hte price would fluctuate based on demand and supply on stock exchange. There are several tax free bonds and NCD’s which are trading at 5% less than the bond price. As long as you are holding it till maturity, you would not see any issue. If you want to sell them interim on stock exchange, you may loose as the price may be less.

  • Madhur

    Hi Suresh,

    I was reading this article about Tax free bonds on economictimes.com. Link (http://economictimes.indiatimes.com/personal-finance/savings-centre/savings-news/why-you-should-remain-invested-in-tax-free-bonds/articleshow/24681486.cms) The author has stated that we should remain invested in Tax-Free bonds because if, as an example, "interest rates were to fall by 1% in the next one year, investors could earn as much as 10-12% by way of capital appreciation on a 20-year bond as well as the tax-free coupon rate of 8.92%. This could take your returns to as high as 20-21% per annum"

    I was unable to understand this statement. How will the investors earn 10-12% by capital appreciation making the total retun to be 20-21%? How will the insvested amount appreciate if the interest rates fall by 1%?

    As per my current knowledge through your forum, if one insvests in Tax free bonds, lets say an amount of 1 lakh, for a 20 year period,  one would get 8.92% interest annually and after 20 years, one would get back the principle amount. Hence this investment is not cummulative. The power of compounding does not apply in tax free bonds.

    Kindly help me clarify my doubts.

    Thanks,

    Madhur

    • Madhur, The logic is simple, but difficult to understand. You would not earn 21% returns per annum for next 15 years. This example is only for 1 year. I would explain to you. Bond value is Rs 1,000 and interest rate is 8.92% per annum. There are several bonds which are trading at Rs 930 also, why ? Because the interest rates is only 7.6% or less than that which were issued earlier. The demand is less, hence they are trading at low prices on stock exchanges. Now let us come back to our example of Rs 1,000 per bond yield of Rs 8.92% interest. Now when interest rates fall. But your bond would still yield 8.92%. People would try to buy these bonds instead of invest in FD or other bonds for 8% interest. Your bond value would increase from Rs 1,000 to Rs 1,050. As a bond holder you would get Rs 8.92% + 5% capital appreciation (Rs 1,050 minus Rs 1,050 your bond value). The reverse also would happen. e.g. if interest rates increase further, means there is less demand for these 8.92% bonds. The bond would get traded at Rs 950 per bond instead of Rs 1,000. Thought your interest is 8.92%, but you lost 5% on account of capital deprecation. This is risk. However if you are holding your bonds till maturity, there is no worry. If you want to sell these bonds, these ups and downs matter.

  • saurabh

    Hi suresh,

    1.Is there any advantage or benefit of one over other b/w NHPC and PFC?

    2.Should one invest now or wait for more tax-free bonds as rates are rising?

    • Saurabh, Even I was thinking in your lines. REC offered low interest, now coming to NHPC or PFC they offer high tax free returns. Do we need to wait, I do not know. There can be new tax free bonds offering high interest or they would not be. If I am in your place with such dilema, I would invest part of my investment (which I thought I would invest in bonds) in this and wait for some more bonds to come.

      • saurabh

        Thanks for your opinion,

        yes it is very much possible that this may be the highest offering and we may get same or lower rates in future bond issues.I think best is to invest half the amount now and keep half for next bond issues.

        One more thought that came to my mind today everyone talks about tax-free bond returns for the tax bracket ppl and how they score better in post-tax returns,but what about those who are in non-tax bracket does it makes sense to invest in tax-free bonds for them?

        • Saurabh, For non tax free associates, they can invest in 9% bank FD. If you invest in tax free bonds, you would get 8.92%. Hence other options would score high than these tax free bonds.

      • saurabh

        One unrelated query,

        Which Demat account would you suggest which is not too costly to maintain and has good reliability and service because for all long term investments DP reliability and recurring expense etc are important.

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